RBI’s crypto ban: When the Reserve Bank of India argues for a policy “leaning towards prohibition” on private cryptocurrencies, it cites financial stability and monetary sovereignty. The Income Tax Department points to evasion through offshore platforms and peer-to-peer transactions. These concerns cannot be dismissed. But they should not end the debate.
Public choice economics asks a question that official assessments tend to avoid: how do an institution’s powers and incentives shape its policy advice?
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RBI’s crypto ban and institutional interest
The RBI issues India’s currency and runs the digital rupee. It also regulates banks and payment systems. A private digital asset used widely for payments or savings would weaken the central bank’s control over the monetary system.
That does not make the RBI’s warnings invalid. Stablecoins denominated in foreign currencies could encourage currency substitution. A sharp fall in crypto prices could hurt households and, if banks were exposed, transmit losses to the financial system. The RBI has warned about both.
But the central bank is not a neutral observer of monetary competition. It is the incumbent.
The RBI has reportedly proposed keeping banks and regulated financial institutions away from crypto assets and privately issued stablecoins. It also acknowledges that prohibition would not stop decentralised or peer-to-peer trading. Its policy would therefore protect the regulated financial system from crypto exposure without eliminating crypto use.
That is a defensible prudential position. It is not the same as proving that citizens should be denied access to an alternative asset.
Gordon Tullock and William Niskanen treated bureaucracies as institutions with interests of their own. Officials seek jurisdiction, discretion and continued relevance. A monetary technology that operates outside the banking system challenges all three. The RBI’s assessment should be read with that institutional interest in view.
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Crypto tax evasion and state visibility
The Income Tax Department has a stronger immediate case. It has issued more than 44,000 communications concerning unreported virtual digital asset transactions and identified about Rs 888 crore in undisclosed income. Offshore exchanges make enforcement harder.
These figures establish a compliance problem. They do not establish a case for prohibition.
India already taxes income from virtual digital assets at 30%, disallows the set-off of losses and deducts 1% at source on transfers. The tax deducted at source gives the department a trail for transactions conducted through compliant exchanges. From April 2026, prescribed reporting entities also face wider transaction-reporting obligations.
Peer-to-peer trades and offshore platforms can escape this net. Cash, informal lending and overseas accounts present similar problems. The usual response is reporting, investigation and prosecution. The state does not prohibit an asset merely because some owners evade tax.
Nor is crypto wholly invisible. Public blockchains preserve transaction records, although identifying the people behind wallet addresses can require exchange data and forensic work. The enforcement problem arises largely where users avoid registered intermediaries or move across jurisdictions.
The tax department’s objection is therefore about legibility. It wants transactions attached to named taxpayers and available for assessment. That is a legitimate administrative interest. It should be described as one, rather than converted into a general verdict on private digital assets.
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Hayek’s case for competing currencies
Friedrich Hayek challenged the assumption that money must be supplied only by the state. In Denationalisation of Money, he proposed competition among privately issued currencies. Users would abandon an issuer that debased its currency and move to one that preserved value.
Cryptocurrencies do not fit Hayek’s model neatly. Many have unstable prices, no identifiable issuer and little use as a unit of account. Speculation has often displaced their monetary function. Stablecoins come closer, though their dependence on reserve assets and private issuers creates another set of risks.
Hayek’s question nevertheless survives: who disciplines a monopoly supplier of money?
An elected government and an inflation-targeting framework impose constraints on the RBI. So do financial markets. Yet none gives Indian savers the direct competitive choice that Hayek had in mind. A ban would remove that possibility before the market has established whether any private digital asset can serve it.
The digital rupee adds another complication. The RBI is simultaneously the regulator of private digital money and the issuer of a competing central bank product. This conflict does not prove bad faith. It does warrant greater scrutiny of a recommendation that favours prohibition.
India’s cryptocurrency policy needs a narrower test
Fraud, misleading sales, weak custody and undisclosed conflicts require regulation. Stablecoin reserves can be audited. Exchanges can be registered. Custodians can be held liable for client assets. Tax evasion can be prosecuted. Banks can face exposure limits.
A prohibition goes further. It restricts monetary choice to protect the state-regulated financial system from a technology that the RBI says cannot be eliminated.
India has not enacted the cryptocurrency prohibition proposed in 2021. Crypto assets remain taxable, while exchanges operate under registration and anti-money-laundering rules. The present arrangement is untidy, but it shows that regulation and enforcement are possible without granting crypto the status of legal tender.
The RBI is entitled to protect banks and the rupee. Parliament must decide whether that mandate also entitles it to suppress private monetary competition. Its answer should distinguish risks to consumers from risks to the central bank’s franchise.
Ankith Reddy is a PhD student at Middle Tennessee state university, USA.